Sunday, December 28, 2008

In the first quarter of the current calender year, we had a whole host of hammers hitting on our head:

- Inflation (rising, and rapidly to historic highs 12-14%).- Ballooning import bill (thanks to crude oil rallying to USD 140 a barrel)- Rapidly deteriorating Corporate India's earnings quality- Cost of financing shooting through the roof, thanks to the RBI- Slowly, but surely drying up of domestic liquidity, owing to the Global Financial Crisis.- Last but not the least, historically high valuations and euphoria on Dalal Street

Result:Sensex & Nifty posted their single largest peak-to-valley drop of close to 60%.

Flash-forward to the last week of Dec'08 and we NO LONGER have the problem of:

- inflation, which is soon expected to drop below 5%- a ballooning import bill due to rising crude oil prices thanks to a 70% drop in intl. prices of crude oil- high cost of financing, thanks to a sharp interest cuts seen in the past few weeks- easing of domestic liquidity, thanks again to RBI's cuts in the CRR, SLR, et al.

And yet: The Sensex and the Nifty continue to struggle. They are now threatening to breach / kiss their October lows. They may, they may not. But, that doesn't matter. What matters is the fact that we are NO longer staring at an ever worsening macro economic situation. And, that to my mind is a big "Go-Ahead" in itself to make investments for the long haul.

One important factor that is still worsening is Corporate India's performance. Dec'08 numbers are likely to one of the worst we've seen in recent history. But, then as the broader macro-economic variables like interest rates, inflation, easing of liquidity, etc. keep improving, performance of companies will surely follow suit, albeit with a small lag. And, as we all know, markets are forward-looking, so maybe we may soon (even if painstakingly slowly) be out of the woods.

What I've not accounted for in this note is a possible war breakout btwn India & Pakistan or a Third Front taking centre stage in India politics in the coming general elections. Both are highly unlikely, but not impossible...

Sunday, December 21, 2008

The 13th Wealth Creation Study organized by Motilal Oswal was held on the 19th December. Among those present included- Rakesh Jhunjhunwala, Raamdeo Agrawal, Sanjoy Bhattacharya and Ramesh Damani. The key speakers exuded great confidence [read the full transcript] in the India Growth story, which to my mind remains pretty much intact irrespective of what the stock markets makes us believe.

Consider the following:

- With a real GDP growth of around 5% over the next decade (a pessimistic estimate) and an inflation of around 5% we are looking at Nominal GDP growing at the rate of "atleast" 10%, which will also reflect in Corporate India's earnings.

- We are still way behind in terms of our physical infrastructure, be it Roads & Highways, Ports, Airports, Hospitals, etc. , when compared some of the other developing nations like CHina, Korea, etc. The investment boom in India has only begun and right now we are only seeing a temporary slowdown.

- Unlike many economies in the West, we will have no bank/insurance company going down under, we have no housing crisis (except for within the developers, and well, they deserve it!), we have no over-leveraged consumers that live beyond their means, we have a corporate sector that is leveraged within a comfortable range whichever one looks at them - Debt to Equity or Interest Coverage, we have a huge middle class building up that will lead to massive explosion in demand for consumer goods over the next decade, the list is really endless...

Bottomline:

Growth will not be a problem so far as India as an investment destination is concerned, its the price that one pays for the investment that will determine returns over the next decade. And it is this factor that is now in the favour of the long term investor...

Tuesday, December 16, 2008

Today's Financial Express had a nice article on what an investor can expect from equity markets over the next decade. The article concluded with the following lines:

--The bottom line is the bulk of equity price declines are behind us, but the equity market is unlikely to recover quickly as a whole. Returns will come from stock picking not market timing or asset allocation decisions. But be aware that while in the past markets were overly optimistic, ignoring any bad news, we are currently in a position where markets are pessimistic and they appear to be ignoring an important bit of good news from the oil markets. So study your stocks now and creep back in, very, very slowly. Add to positions, no faster than 5% per week. The best traders are good averagers.--

I concur with the author of this article and am of a firm belief that markets hereon will indeed be a stock pickers heaven given that a large part of price destruction is already done with, nevertheless, on the whole I am not as bearish.

Sunday, December 14, 2008

I am trying to get hold of Sensex data prior to 1991, which might indicate whether we've been _here_ before (in terms of volatility) for such an extended period of time. However, it is quite clear from the post that bull-markets have begun only after a prolonged period of low volatility (as was the case in 1998-99) or during (2002-03). So the next bull market may only come about when we witness a dramatic drop in volatility, that too over an extended period of time. Even in December we've had days of sharp moves, both on the upside and on the downside.

The bigger question is: whether this is an opportune time to make long term investments?

I am initiating a new thread "Time to Invest: Dec'08-Jun'09". This is because, I personally believe that this indeed is a good time to make long term investments. Markets may come back to re-test the lows of Oct 27, or it may have already bottomed out. But, we are surely not looking at another bull run for sometime now. However, that's the advantage one has, if one is looking to make long term investments.